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Agenda Item # 25

BOARD MEMORANDUM

FOR INFORMATION ONLY

The attached document consists of the following two elements: (a) monthly legislative report; and (b) legislative history for the 2003-2004 session of the California Legislature.

The monthly legislative report summarizes recent developments concerning important transportation and other issues at the federal and state levels.

The legislative history describes some of the key transportation-related bills that are being considered by the state Legislature during the 2003-2004 session. It indicates the status of these measures and any adopted VTA positions on them.

Monthly Legislative Report
July 2003

The current legislation that authorizes federal surface transportation programs—the Transportation Equity Act for the 21^st Century (TEA-21)—expires September 30, 2003, less than three months from now. The reauthorization bill for highways and transit, which occurs only once every six years, is one of the largest and most significant pieces of legislation that Congress will consider, setting transportation policy for the rest of the decade. At this point, there is tremendous uncertainty in Washington, D.C., as to whether the House and the Senate can each pass a TEA-21 reauthorization bill, let alone come together and agree on a final version that President George Bush will sign into law by the September 30^th deadline.

The main reason for this uncertainty is the lack of agreement among House and Senate transportation leaders, the Republican House and Senate leadership, and the White House on what the overall funding levels for federal highway and transit programs should be. TEA-21 provided $218 billion over six years, the largest public works bill in the history of the United States. Although both Congress and the White House are set to break that record again given that all parties agree that transportation infrastructure needs are well-justified and far outstrip available public resources, there is significant disagreement on the extent to which federal funding should be increased for highways and transit. The range of proposed funding levels for federal surface transportation programs during the reauthorization period starts at a low of $247 billion and runs to a high of $375 billion, a gap of $128 billion.

In February 2003, the Bush Administration sent its FY 2004 budget request to Capitol Hill, which suggested $247 billion for the TEA-21 reauthorization bill over the next six years. This figure represents very modest growth in both the federal highway and transit programs over the reauthorization period.

Subsequently, the Administration presented its specific TEA-21 reauthorization package to Congress in mid-May 2003. This plan, which is known as the Safe, Accountable, Flexible, and Efficient Transportation Equity Act of 2003, or “SAFETEA,” reaffirmed the Administration’s earlier position, recommending approximately $247 billion for federal surface transportation programs from FY 2004 through FY 2009. Of this amount, $45.7 billion would be authorized for transit, $192.5 billion for highways, and $8.8 billion for highway safety.

The budget resolution adopted by Congress in April 2003 sets funding levels for federal highway and transit programs at a slightly higher figure of $273 billion over the next six years. However, transportation advocates in both chambers were successful in having language included in the budget resolution that permits this number to increase if Congress agrees to additional revenues.

The key players on the Senate Environment and Public Works Committee, which has jurisdiction over the federal highway title, and the Senate Banking, Housing and Urban Affairs Committee, which oversees transit, are seeking a $311.5 billion funding package over six years. Meanwhile, the leadership of the House Transportation and Infrastructure Committee, which will craft the House version of the TEA-21 reauthorization measure, has put forward the most ambitious funding proposal of all—$375 billion over six years.

In addition, a range of options for raising more money for highways and transit has surfaced. These options include:

• Cracking down on fuel tax evasion. It is estimated that approximately $1 billion per year is lost to the Highway Trust Fund because of illegal activities related to evading federal fuel taxes.

• Eliminating the 5.2-cent-per-gallon federal tax exemption for ethanol-based fuels. Currently, ethanol fuels are taxed at only 13.2 cents per gallon, while gasoline is taxed at 18.4 cents per gallon. This 5.2-cent tax exemption was created years ago as an incentive to encourage the use of ethanol-based fuels. There is some discussion on Capitol Hill about taxing ethanol at the same rate as gasoline and providing a tax credit to ethanol producers instead, so that the Highway Trust Fund would no longer be adversely impacted by the ethanol subsidy. This change would raise about $2 billion per year for the Highway Trust Fund. Agricultural interests have joined with transportation groups to support this proposal, so long as ethanol producers get the tax credit. However, that would create a budgetary offset issue.

• Capturing the 2.5 cents of the 13.2-cent-per-gallon federal fuel tax on ethanol that currently goes to the General Fund for the Highway Trust Fund. This is the only revenue-raising option that is supported by the Administration in its SAFETEA bill and that has broad support on Capitol Hill. It would generate approximately $700 million per year for the Highway Trust Fund.

• Drawing down the balance in the Highway Trust Fund. Currently, there is about $18 billion sitting in the Highway Trust Fund. Although federal law requires that a certain amount remain in the Highway Trust Fund, so that it can pay future obligations, estimates indicate that $9 billion could be safely drawn down.

• Crediting the interest earned on the balance in the Highway Trust Fund back to the fund. As part of the deal for obtaining guaranteed budgetary treatment for highways and transit when TEA-21 was passed in 1998, the interest from the Highway Trust Fund was sacrificed to the General Fund. Some members of Congress want to go back to the way things were prior to the enactment of TEA-21 and credit this interest to the Highway Trust Fund.

• Indexing the federal fuel tax, both retroactively to 1993 (the year of the last fuel tax increase) and prospectively, by tying it to the Consumer Price Index. The federal fuel tax was last changed in 1993, when it rose to 18.4 cents per gallon. If this tax were to be adjusted for inflation over the last 10 years, it would increase the rate immediately by 5 cents to 23.4 cents per gallon. If it were then tied to the Consumer Price Index for future years, by 2009, the rate would be about 26 cents per gallon. Indexing is the heart of the $375 billion funding proposal that has been put forth by House Transportation and Infrastructure Chair Don Young (R-AK). However, this option is opposed by the White House, the House and Senate Republican leadership, Senate transportation leaders, and many rank-and-file members of Congress.

• Raising the federal fuel tax. A “two cents makes sense” proposal that calls for increasing the federal fuel tax two cents per year over six years has been floated by road-builder interests and has been supported by Young. However, as with indexing the fuel tax, this proposal is opposed by the White House, the House and Senate Republican leadership, Senate transportation leaders, and many rank-and-file congressional members.

• Bonding the transit program. Senate Finance Committee Chair Charles E. Grassley (R-IA) and Ranking Member Max Baucus (D-MT) have suggested transferring most of the 2.86 cents of the 18.4-cent federal gas tax that currently is dedicated to the Mass Transit Account for transit purposes to the Highway Account as a way to increase funding levels for highways. In turn, a tax credit bond financing mechanism would be created to fund most of the federal transit program. This idea is extremely controversial.

• Allowing for more toll facilities. Several proposals are actively under consideration to relax current federal prohibitions on permitting states to place tolls on Interstate highways, as well as to create high-occupancy toll (HOT) lanes or truck-only toll lanes.

If an agreement on the overall funding levels for highways and transit is not reached soon, chances are that Congress will opt to do a simple extension of current law through 2004 or perhaps even through 2005. This scenario actually occurred during the consideration of TEA-21, when a six-month extension was passed in the fall of 1997 under circumstances very similar to those that exist today. At that time, then-House Transportation and Infrastructure Committee Chair Bud Shuster and other key congressional transportation players were not satisfied with the funding levels that were being made available by the House and Senate leadership. They refrained from putting together a multi-year reauthorization bill until nine months later, when circumstances were more favorable. By waiting, they were able to achieve the highest funding levels in history for highways and transit, plus unprecedented budgetary protection for these programs.

In the House, Majority Leader Tom DeLay (R-TX) has been out front in terms of waging the battle against any increases in the federal fuel tax or indexing. The House leadership and the White House do not want Republicans to vote for any kind of tax increases and certainly do not want President Bush to sign one into law. Young, on the other hand, has stated that he must have at least some form of indexing for him to move a TEA-21 reauthorization bill out of the House Transportation and Infrastructure Committee.

If a satisfactory agreement cannot be reached, Young has stated publicly that he will pass a simple one- or two-year extension of TEA-21 because he does not want to lock in meager funding levels for highways and transit for the six-year reauthorization period. A two-year extension of TEA-21 is on the table because the general thinking is that it might be even harder to raise or index the federal fuel tax in a presidential/congressional election year than it is right now. However, this strategy also would be a gamble in that it assumes that the current congressional leaders will still be in power after the next election in 2004, and that President Bush will be re-elected.

In the Senate, transportation leaders have determined their funding goals, but are having a difficult time reaching them without conceding to an increase in or an indexing of the federal fuel tax, which they, as well as the Senate leadership, currently oppose. Although the Baucus-Grassley proposal has surfaced as a way to increase federal highway and transit funding without raising or indexing the gas tax, it has drawn strong opposition from the Senate Banking Committee leadership, the American Public Transportation Association (APTA) and numerous other transportation interest groups. In addition, U.S. Department of Transportation Secretary Norman Y. Mineta recently testified before Congress that the Administration does not support the Baucus-Grassley plan.

Although Senate Environment and Public Works Committee Chair James Inhofe (R-OK) has not yet said publicly that he will consider a short-term extension bill, the committee’s ranking minority member, James Jeffords (I-VT), indicated recently that if sufficient resources for a long-term bill cannot be found, then he would support a short-term extension and opt for revisiting the matter next year.

Even though the overall funding levels for highways and transit remain undecided, the relevant House and Senate authorizing committees are hard at work attempting to draft the policy framework for their bills, with the hopes of being able to mark them up sometime this summer. So the possibility still exists that a TEA-21 reauthorization bill could be ready for final adoption by Congress sometime this fall. With the nation’s economy still struggling, pressure may build within Congress for passage of some type of an economic stimulus/jobs package this year, and a transportation reauthorization bill would fall into that category. And if the President decides that he “needs” a TEA-21 reauthorization bill now, all kinds of compromises that do not seem doable today could become viable.

The other important factor is that House Transportation and Infrastructure Committee Chair Young has received more than 5,200 individual project requests from House members totaling about $300 billion. Therefore, Young is attempting to play the same game that all other transportation committee chairs have played before him—using project requests as leverage for votes on other issues. The value of this card cannot be underestimated.

The bottom line is that federal funding for highways and transit is a high-stakes political debate, the outcome of which is difficult to determine at this time. However, the next two months are likely to be very probative in terms of whether Congress will pass a comprehensive, multi-year TEA-21 reauthorization bill this year or opt for a short-term extension of existing law.

Approved by a 69 percent vote in March 2002, Proposition 42 made permanent the shift in gasoline sales tax revenues from the General Fund to transportation that was begun in 2000 with the passage of the six-year, $6.8-billion Transportation Congestion Relief Plan (TCRP). Specifically, Proposition 42 amended the California Constitution to permanently dedicate the sales tax on gasoline (roughly $1.1 billion in FY 2004) to various transportation purposes beginning in FY 2004.

Mindful of the fiscal impact to the state budget of such a shift, the crafters of Proposition 42 allowed the transfer of gasoline sales tax revenues from the General Fund to transportation to be suspended when both of the following conditions are met:

• The Governor has issued a proclamation that declares that the transfer of gasoline sales tax revenues will result in a significant negative fiscal impact to the General Fund.

• The Legislature enacts the suspension or partial suspension by a two-thirds vote in a stand-alone bill.

For the first five years of Proposition 42, $3.3 billion in the gasoline sales tax revenues is dedicated to the 141 projects contained in the TCRP. These projects were approved by the Legislature in 2000 as part of AB 2928 (Torlakson). In addition, Proposition 42 follows the same formula that was included in AB 2928 for funding other transportation needs. Specifically, it provides that after a $678-million transfer is made to fund TCRP projects, the remaining revenues are to be allocated to the State Transportation Improvement Program (STIP), local streets and roads, and the Public Transportation Account according to a 40:40:20 percentage split. However, the Legislature may change the formula for how the funds are distributed between these three categories by a two-thirds vote.

The economic boom that spawned the TCRP has been followed by a dramatic downturn in the state’s economy, leading Governor Gray Davis to propose a partial suspension of Proposition 42 for FY 2004, even before the constitutional amendment has taken effect. The Governor’s recommendation has generated considerable debate within the Legislature, resulting in the Senate and Assembly putting forward two distinctly different proposals related to the TCRP and transportation.

For the most part, the Senate version of the FY 2004 state budget follows the direction of the Governor. It calls for partially suspending Proposition 42 and for providing only enough funding to meet the cash flow needs of TCRP projects that received an allocation prior to December 2002.

By contrast, the Assembly version goes several steps further by recommending sufficient funding to meet the cash flow needs not only of TCRP projects with existing allocations, but also for projects that would seek further allocations in FY 2004. In addition, the Assembly version provides a combined $273 million from Proposition 42 revenues for the STIP, local streets and roads, and the Public Transportation Account distributed according to the 40:40:20 formula.

Neither the Senate nor the Assembly version of the FY 2004 state budget honors existing law relative to the “spillover,” an arcane formula that requires General Fund transfers to the Public Transportation Account when gasoline prices are high and the overall state economy is sluggish. The Senate followed the Governor’s lead by diverting the entire $87.4 million in spillover revenues to the General Fund, resulting in a statewide loss of approximately $43.7 million to the State Transit Assistance Program (STA), and a like amount loss to the Public Transportation Account’s capital program.

On the other hand, the Assembly chose to use the entire amount of spillover revenues to provide funding for the STIP, local streets and roads, and the Public Transportation Account according to the 40:40:20 split. Although questions were raised as to the legality of diverting the spillover revenues, the Legislature has imposed caps on it several times in recent years, and the action has never been challenged.

The Assembly version of the FY 2004 state budget provides for a $1 billion loan of Proposition 42 funds to the General Fund. On the other hand, the Senate recommends that the General Fund receive $1.5 billion in transportation revenues. Which proposal eventually wins out will largely depend upon the result of negotiations involving the so-called “Big Five,” which consists of the Governor, Senate President Pro Tem John Burton (D-San Francisco), Senate Minority Leader Jim Brulte (R-Rancho Cucamonga), Assembly Speaker Herb Wesson (D-Culver City), and Assembly Minority Leader Dave Cox (R-Fair Oaks). These negotiations were not concluded in time for a state budget to be in place on July 1, 2003—the beginning of the new fiscal year.

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